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More and more analysts looking at the euro zone predict that
another recession is inevitable, as banking sector tensions
combined with political wrangling over the debt crisis will
depress consumer confidence further and will choke funding for
business.

Economists at Goldman
Sachs expect the euro zone to fall into recession in the
fourth quarter, on the back of "a negative confidence shock and
tighten fiscal policy, combined with private-sector deleveraging
in the periphery."

They predict overall growth of 0.1
percent for the single currency area next year, but say that
"funding difficulties for banks represent a clear downside risk
to this forecast."

Tensions in the banking system are not
yet visible in lending data for the area, but they could lead to
a "significant" worsening of funding conditions for companies and
households, the Goldman Sachs economists wrote in a research
note.

They pointed out that the funding
situation for banks in the euro zone is becoming more challenging
because the value of banks' collateral has declined sharply after
the accelerated sell-off of euro zone bonds over the past two
weeks.

This is problematic for the private,
inter-bank lending market but also for liquidity provisioning via
the European Central Bank, because "the market value of the
collateral is an important side constraint in determining the
amount of liquidity banks can obtain from the ECB," Goldman Sachs
economists wrote.

"Against this backdrop, the renewed
tightening in lending conditions for the euro-area private sector
comes as no surprise," they said.

"We think it reasonable to assume that
the longer it takes to stabilize the situation in the banking
sector, the greater the risk that bank lending behavior will at
some point lead to a sharp decline in economic activity," the
Goldman Sachs economists added.

No Quick
Solution

Hopes for a swift resolution have been
dampened after yet another inconclusive summit on Thursday.

German Chancellor Angela
Merkel, French President Nicolas
Sarkozy and Italian Prime Minister Mario Monti's meeting did
not result in any new initiatives, with Merkel reiterating her
opposition to issuing joint euro bonds and allowing the ECB to
print money.

This means sorting out the euro zone
debt crisis will take time and will be painful, some analysts
said.

Besides the German obsession with
central bank independence and fear of hyperinflation, the core of
the German opposition is "all about conditionality," Carsten
Brzeski, an analyst with ING, said.

"The German government does not believe
in a quick fix of the crisis, only in structural changes,"
Brzeski said.

"In fact, chancellor Merkel has recently
made several pleas for more political integration in the euro
zone. However, it is obvious that the German government first
wants to see more political integration before it would give
structural access to German money. This explains the German
emphasis on Treaty changes," he added.

Even so, a reversal of international
capital flows and a fall in profit margins will be needed for
sustained economic recovery, according to author Andrew Smithers,
founder of research firm Smithers & Co.

"If things go well, investment will hold
up despite falling profit margins and the higher labor share will
support consumption, possibly with help in the euro zone from
falling household savings," Smithers wrote in a market note.

"If things go badly, the developed world
will fall back into recession. Either way profits will fall and
are likely to bring down stock markets," he added.